Low crude oil prices help BPCL's marketing business, make analysts bullish on stock

Bharat Petroleum Corp (BPCL) has relatively stable refining margins and, therefore, it rarely surprises the market negatively. With a 46% jump in net profit, BPCL has, once again, met market expectations in the third quarter of 2015-16. A significant spike in the gross refining margin (GRM) and the resultant 81% year-on-year (y-o-y) increase in earnings before interest, tax, depreciation and amortisation were the main highlights of its third quarter results.

Like other oil marketing companies (OMCs), BPCL too has been a major beneficiary of the fall in crude oil prices and the resultant fall in underrecoveries in petroleum products. The government has already capped its subsidy burden at Rs 12 per litre for kerosene and Rs 18 per kg for LPG. After realising the success of Aadhaar card-linked direct benefit transfer (DBT) scheme in providing the LPG subsidy, the government has started implementing DBT on a pilot basis for giving out kerosene subsidy. That means, if crude oil doesn’t move up significantly from the current level, there won’t be any subsidy burden for OMCs in 2016-17.


The domestic oil demand has increased in the recent past due to the fall in prices. The domestic sales volume in the third quarter of 2015-16 went up 8% y-o-y on the back of a strong demand for petrol and diesel. The recent push for the road sector in the Budget should further boost demand for petrol and diesel in the coming years.

Unlike other OMCs, BPCL has a significant exposure to overseas oil and gas fields. While the company is doing an appraisal of its assets in Brazil, it’s subsidiary is expected to invest around $100 million (over Rs 670 crore) in calendar year 2016 in an oil field in Mozambique in which BPCL has around 10% stake. The current low oil and gas prices should help BPCL’s overseas ventures get fater clearances and at a lower cost. Since the current level at which crude is trading is not sustainable in the long term, prices are expected to recover in the next 2-3 years, by the time these field become operational. However, BPCL will be negatively impacted if crude oil prices remain this low for an extended period.


Unlike other OMCs, BPCL is valued using the sum of parts (SOP) valuation method and analysts peg the valuation for its overseas upstream projects at around Rs 200 per share. Since these overseas ventures are yet not operational and thus not making profits, their impact won’t be captured in valuation ratios such as PE. This is one reason why it looks like the stock is quoting at premium valuation compared to its peers.
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